Saturday, July 9, 2011

Keynes’s “Unemployment Equilibrium”

The use of equilibrium in the sense of Keynes’s expression “unemployment equilibrium” is potentially confusing. Keynes does not use the word “equilibrium” here in the sense of a static system where nothing changes:
“Keynes used the ‘rest’ definition of equilibrium only with respect to employment, and this did not preclude the possibility of money-wage rates and prices changing in such a situation, as long as these changes do not have any clear effect on the level of employment. Patinkin (1965: 315) used a definition of equilibrium that referred not only to one dependent variable but to the economic system as a whole: ‘“equilibrium” means that nothing tends to change in the system.’ According to this definition, Keynes’s unemployment equilibrium is a position of ‘disequilibrium’ because of the consequent changes in the values of other variables. Patinkin was aware of the implicit definition used by Keynes. ‘All, then, that Keynes means by the statement that the system may settle down to a position of “unemployment equilibrium” is that the automatic workings of the system will not restore the system to a position of full-employment equilibrium. He does not mean “equilibrium” in the usual sense of the term that nothing tends to change in the system’ (643). Leijonhufvud (1969: 22n) also interprets Keynes’s ‘unemployment equilibrium’ as implying the weakness of the forces ‘tending to bring the system back to full employment.’” (Asimakopulos 1991: 27, n. 3)
Keynes’s view was that real-world capitalist systems have a tendency to fluctuate around a state well below full employment:
“our actual experience … [sc. is] that we oscillate, avoiding the gravest extremes of fluctuation in employment and in prices in both directions, round an intermediate position appreciably below full employment and appreciably above the minimum employment a decline below which would endanger life.” (Keynes 2008 [1936]: 229).

BIBLIOGRAPHY

Asimakopulos, A. 1991. Keynes’s General Theory and Accumulation, Cambridge University Press, Cambridge.

Keynes, J. M. 2008 [1936]. The General Theory of Employment, Interest, and Money, Atlantic Publishers, New Delhi.

Leijonhufvud, A. 1969. Keynes and the Classics: Two Lectures on Keynes’ Contribution to Economic Theory, Institute of Economic Affairs, London.

14 comments:

  1. Fluctuate below full employment? Krugman was being a little misleading, when he said he believed postwar Europe and America had full employment.

    So I am guessing that in context, when a Keynesian says full employment, he means arbitrarily close to full employment?

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  2. The state of full employment does not - and never has - meant zero unemployment. Of course, there is always seasonal and frictional unemployment.

    The Keynesian policy prescription is "full employment" in the sense of very high employment and minimal involuntary unemployment - less than 3%, for example - and fiscal and macro policy to make sure it stays low. As far as I know this is what Keynesians have always meant when they use the expression "full employment".

    The MMTers want to eliminate even small amounts of involuntary unemployment by a basic job guarantee program - not a bad idea, in my view.

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  3. Two part post.

    1. Wikipedia, an admittedly inaccurate source, mentioned in its article about Clement Attlee that he was wrongfully trying to address unemployment in postwar Britain, when there were serious labour shortages, at only 4% level of unemployment. I know you gave 3% as an arbitrary example, but it's interesting that even at 4% seasonal/frictional unemployment, there could already be problem of labour shortages.

    2. I don't understand this purely abstract idea of government "buying" or "selling" this "buffer stock" of labour.

    In what job will you place people? Will it reflect their existing skills and preferences? Will it allow them to train the skills required to begin another job that they intend to seek in the future? Will it allow them to advance further in careers that they seek?

    Who will buy or use their services? What will they produce and who will demand those things?

    Why not just give money to the unemployed and get over it?

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  4. In what job will you place people?
    Who will buy or use their services? What will they produce and who will demand those things?

    You administer it at the local level: e.g., by asking private aid, charity, social service, community groups, local government, if they could usefully employ more people if the federal government paid the wage.

    Will it reflect their existing skills and preferences?

    Of course.

    Will it allow them to train the skills required to begin another job that they intend to seek in the future?

    In some, maybe many cases, undoubtedly.

    Will it allow them to advance further in careers that they seek?

    Depends on the job they want, doesn't it? Anyway to be an effective program it does not necessarily need to do this.

    Why not just give money to the unemployed and get over it?

    Because having a job keeps people from sinking into long term unemployment, give them a scoial life, allows them to learn new skills, and business prefers to hire people ALREADY employed. Perhaps you don't know this?

    The private sector can bid away people it wants.

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  5. All in all, it is splendid plan.
    L. Randall Wray explains it here from 15.00 minutes:

    http://www.youtube.com/watch?v=TVMaQmDSi9Y

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  6. Also, there are plenty of unemployed PhDs - people with expert knowledge of engineering, IT, the natural sciences etc, some of these people end up as taxi drivers - why not use their skills in increased government-funded basic sciences research and R&D programs?

    Youth unemployment is a scandal in many countries - it would address that too.

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  7. No, it's just that...

    Look, I don't like to buy into the crude, unfair stereotypes about the public sector that is fashionable in modern debate.

    But The Economist had a report on public sector unions, and in their both-sides-of-the-story approach, they conceded their research showed genuine cases of people in the public sector who are just paid to show up and do nothing all day long. This is the result of the using public sector not for public tasks, but as a tool of employment. Those staff are admittedly not liked by fellow public sector colleagues either and are generally in the minority.

    But you get the point Guaranteeing 100% employment comes with the risk of many such "coathanger" employees, as they are called. And despite the genuine commitment to work and honesty in many people in the workplace, the coathanger employee exists, because he and his direct employer have nothing to lose personally. It's other people's money, after all. Besides, there is only ever so much work required, that more people become redundant after a point. It's a potential Black Hole situation, where additional inputs brings no additional output.

    A job is only as useful as what it produces. IBM has come down from 405,000 employees in 1985 to 316,000 employees in 2000, because it doesn't need more than that to earn the $90+ billion it earns every year. If those 89,000 people in IBM were still there, they would be paid for showing up and doing nothing. This is reality - demand for IBM staff is limited by demand for IBM's products.

    Unemployment is a dehumanizing situation, but so is overemployment, although not as much. The latter is demoralizing to other people in the workplace, who feel they work hard for the same rewards as the additional staff who are not easily removed. The public sector had a respectable face once, and hired the most competent people for tasks of public officials. As it becomes a mechanism of guaranteeing employment, its standards come down, and its respective prestige is hurt. I know personal testimonies don't count much, but the professors at the partly government-funded, partly religious trust funded college I attend have this feeling about certain other colleagues, whom they have been forced to hire under compulsion of public policy, without power to refuse them.

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  8. As for labour shortages, they are preferable to large scale unemployment.

    Moreover, labour shortages mean the steady stream of graduates from polytechs/universities/apprenticesips will have jobs and the realistic expectation of a job, doesn't it?

    Serious labour shortages can be dealt with by encouraging more young people to learn the appropriate skills or graduate with the relevant degrees.

    Immigration of skilled labour provides yet another cure.

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  9. "I don't understand this purely abstract idea of government "buying" or "selling" this "buffer stock" of labour."

    The government buys labour during recessions - this acts as a counter cyclical force.
    The minimal wage provides a floor below which aggregate demand will not fall.

    The private sector buys/bids labour away during booms. We avoid the economic waste and moral disgrace of long term unemployment.

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  10. Prateek Sanjay,

    Oops, owing to your comment turning up in my spam blocker, I fear I have accidently deleted it.

    Apologies

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  11. oh wait - it does appear above.
    My mistake.

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  12. "The public sector had a respectable face once, and hired the most competent people for tasks of public officials. As it becomes a mechanism of guaranteeing employment, its standards come down, and its respective prestige is hurt"

    These jobs in the buffer stock jobs program are not even necessarily in the public sector - they can be in, as I have said, private organisations, non-profit private charity, social service groups, or for-profit community groups, sports clubs etc.

    Such a program does not mean that you can't get fired for not working or being lazy.

    But you get the point Guaranteeing 100% employment comes with the risk of many such "coathanger" employees, ...

    Actually it would not be 100%, it would not include frictionally unemployed people and probably not even many people techniclaly "seasonally unemployed", because the former are moving to a new job at some stage (3, 6, 12 months) and the latter may not want to again until their seasonal source of work (say, tourism) is available again.

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  13. On another issue, you are right that the productive sectors of the economy require less and less people. As automation, robotics, AI procedes, that trend will accelerate. But then you have the severe program of structural unemployment. What is the good of automatic manufacturing, farming or even some service industries if demand for output collapses?

    The future will require radical employment programs or direct guaranteed income to maintain living standards:

    http://socialdemocracy21stcentury.blogspot.com/2010/09/automation-and-robotics-future-of.html

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  14. Why not just give money to the unemployed and get over it? This is comparatively inflationary. The JG fights inflation in at least three ways: 1) By the extra production it may entail, compared to transfer payments. If they build widgets or bridges, now society has valuable widgets and bridges which will lower other costs, mitigating or even reversing the effects of the higher spending. 2) Countercyclically, as the private sector picks up, the JG sector, and hence spending on it will shrink. 3) Rare - say there is a crazy tulipmania asset price bubble and attendant inflation, the government can break its back by creating a depression by fiscal or monetary policy, but eliminate the worst effects by employing the attendant unemployed. If the private sector goes utterly bonkers, effectively the government can commandize the economy until it comes to its senses. Just threatening to do this could be enough to burst bubbles.

    A good way of thinking of the JG is that it is like a gold standard. It is a labor standard stabilizing the value of money.

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